The taxation of tobacco products

This chapter reviews a variety of issues related to the taxation of cigarettes and other tobacco products. The empirical evidence showing that higher cigarette taxes result in higher cigarette prices is reviewed. This is followed by a discussion of the econometric literature examining the impact of prices and taxes on the demands for tobacco products. The small but growing body of research for low-income and middle-income countries clearly shows that higher prices would lead to significant reductions in tobacco use. Similarly, numerous studies from high-income countries reach the same conclusion. The estimated price-elasticities for low-income and middle-income countries are about double those for high-income countries, where estimates center on –0.4. Because of the addictive nature of tobacco use, demand for tobacco products is more elastic in the long-run. In addition, estimates from high-income countries indicate that youth and young adults, less educated persons, and those with lower incomes will be relatively more responsive to price changes. This review is followed by a discussion of the various motives for tobacco taxation, including the use of these taxes to generate revenues and to improve economic efficiency and public health. Finally, several other issues in tobacco taxation, including the earmarking of tobacco tax revenues and barriers to tobacco taxation, are discussed.